InterDigital v Lenovo: a blueprint for negotiations over Standard Essential Patents?

Licence negotiations between InterDigital and Lenovo started in 2008. The action itself started in August 2019, and the trial started in Jan 2022. By this time InterDigital had established that some of its UK patents were valid and essential, and that it was therefore entitled to an injunction, subject only to its undertakings to ETSI. The trial occupied 19 hearing days, with four days set aside for pre-reading which the Judge considered woefully inadequate). The court received 23 witness statements of fact from ten witnesses for InterDigital and 30 expert reports from 12 experts (six for InterDigital and six for Lenovo), plus hundreds of pages of submissions. It received further analysis and submissions late in 22 and early in 2023, before producing a judgment of 959 paragraphs and 225 pages. 

InterDigital's last offer was for a lump sum of $337 million for six years of sales of 3G, 4G and 5G handsets, from 1 January 2018 to 31 December 2023, equivalent to a blended rate of $0.498 per device, plus a release for past sales. Lenovo's last offer was for a lump sum payment in a range, for sales in the same period. The midpoint of the range was approximately $80 million. 

So, there was about $157m between the parties, a sum sufficient to justify litigation. While the cost of the UK proceedings was, no doubt, high, there is also no doubt that the cost of more than a decade of negotiation, parallel proceedings in the US and China, and associated global uncertainty, was also high. 

Ultimately, the Court found that a lump sum payment of $138.7 million was FRAND, equating to about $0.175 per device (including devices sold outside the relevant limitation period).

The main issues for the Court to decide were whether InterDigital’s conduct was FRAND, whether it was entitled to an injunction, and, if not, what licence terms were FRAND. Translated into more colloquial language used by some lawyers, the issues were:

• How did Lenovo escape an injunction?
• Was InterDigital being punished for succumbing to hold-out, and agreeing heavily discounted rates with the largest players in the industry in order to secure deals with them?

In Unwired Planet, Birss J explained that FRAND was a process. Mellor J agreed, which had implications for how an SEP licensor should conduct itself in order to be characterised as a willing licensor. For example, an SEP owner was not acting as a willing licensor if it refused to provide information necessary for a willing licensee to evaluate an offer. In the circumstances of the present case, he considered that InterDigital had not acted as a willing licensor. The corollary finding was that, for the most part, Lenovo had acted as a willing licensee, because it had been justified in seeking information, and in not agreeing to any of InterDigital’s offers in the absence of that information. 

In any event, the Judge found that an SEP owner's obligation under the ETSI policy was irrevocable, so InterDigital could not "revoke its undertaking to licence on FRAND terms, whether generally or in respect of any particular implementer." However, if Lenovo refused to undertake to accept a licence on terms that the Court found to be FRAND, an injunction would follow. This gives rise to a timing question: by when should an implementer undertake to accept a licence?

Mellor J considered that such an undertaking should be given at the latest when final orders are being formulated at the end of the first technical trial in which a patent is found valid and essential. In this case, Lenovo had been allowed to get away with a conditional commitment until very late in the day. Mellor J regretted this, and in the course of his explanation deprecated the "ingenuity" of lawyers to "generate fresh, undecided issues surrounding the correct approach".

The short answer is no. 

InterDigital put forward 15 licences (trimmed from 20) as comparables and led extensive expert evidence explaining how they could be "unpacked" to provide royalty rates which supported the "program rates" published on its web site. However, it did not escape Mellor J that not one of InterDigital's experts or witnesses of fact explicitly supported their selection. On the other hand, Lenovo identified seven licences as comparable. These were all lump sum agreements with the world's largest handset suppliers, and collectively covered 50 times more handsets than the total covered by the 15 selected by InterDigital.

Unsurprisingly, the effective rates in InterDigital's selection were much higher than the rates in the 'Lenovo 7'. Indeed the "unpacked" effective rates in the Lenovo 7 were about 20% to 40% of InterDigital's program rates. This suggested to the Judge that, if InterDigital really believed that its program rates were FRAND, it had given away USD billions in revenue, while at the same time maintaining in its evidence that its licensing program was working well for it.

The Judge was "driven to the clear conclusion" that, aside from observations specific to individual licences, there was "no evidence of InterDigital being forced by extensive hold-out to grant discounts of 60%, 70% or 80% to the largest licensees" nor that the Lenovo 7 "imply rates which are far below the true value of InterDigital’s portfolio".

The ultimate result is consistent with Birss J's observation in Unwired Planet, that it would not be FRAND for a small new entrant to the market to have to pay a higher royalty rate than an established large entity. Rather, "the FRAND rate ought to be generally non-discriminatory in that it is determined primarily by reference to the value of the patents being licensed and has the result that all licensees who need the same kind of licence will be charged the same kind of rate." 

A significant aspect of InterDigital's case was that its published program rates were FRAND, and the fact that it had offered discounts to large implementers in order to secure licensing deals did not affect that. Its approach to adjusting the "effective rate" in those licences to a rate appropriate for Lenovo therefore involved removing all the discounts said to have been extended during negotiations to the relevant implementer in order to restore the "pre-discount rate", and then applying to that rate any discounts for which it (subjectively) considered Lenovo qualified. Invariably, this resulted in a rate for Lenovo that was much higher than the effective rate in the licence being compared. 

Lenovo's expert witnesses were critical of this approach, for good reasons. For example, they explained: 

"[InterDigital's] analysis relies on the assumption that a valuation unpacking of comparable licenses should in effect "restore" revenue and value for the licensor that was not actually realized in the transaction, and which the licensor considers was forgone as a "discount", in order to arrive at an assumed market value. … This complicated methodology strays from the core valuation exercise that seeks to understand how much is actually paid per device by other companies in the market that are comparable to Lenovo."

The Judge accepted these criticisms.

In short, the Judge did not think that limitation periods ought to be taken into account, because a claim for payment of FRAND consideration for an SEP licence was not a claim for damages for patent infringement. Rather, he considered that a willing licensee would not refuse to pay whatever licence fees were determined to be applicable in respect of units implementing the relevant standard, even if they were produced and sold more than six years prior to the determination. An implementer who so refused would not qualify as a ‘willing licensee’. 

Importantly, taking limitation periods into account would automatically insert "an on-going perverse incentive to delay the agreement or setting of FRAND terms for as long as possible" into the process, which would not be FRAND.

It is worth noting that the Judge considered his approach to be inconsistent with the approach of the US CAFC, in TCL v Ericsson, where it decided that a release payment was, in substance, compensatory relief for past patent infringing activity.

In the end, both parties relied on a licence that InterDigital concluded with LG in 2017 as a reasonable comparable. The Judge carefully analysed and translated the rates in that licence to Lenovo's circumstances, making adjustments for differences in handset sales (a) under the 3G, 4G and 5G standards, (b) between developed and emerging markets, and (c) between countries with varied InterDigital patent holdings.